Irene Tasi - Director-Investor Relations Keith J. Allman - President, Chief Executive Officer & Director John G. Sznewajs - Chief Financial Officer, Treasurer & VP.

Dennis P. McGill - Zelman & Associates Keith Hughes - SunTrust Robinson Humphrey, Inc. James H. Armstrong - Vertical Research Partners LLC Stephen S. Kim - Barclays Capital, Inc. Stephen F. East - Evercore ISI George L. Staphos - Bank of America Merrill Lynch Nishu Sood - Deutsche Bank Securities, Inc.

Robert Wetenhall - RBC Capital Markets LLC William Wong - JPMorgan Securities LLC Megan McGrath - MKM Partners LLC.

Good morning, ladies and gentlemen. Welcome to Masco Corporation's Third Quarter 2015 Results Conference Call. My name is Carol, and I will be your operator for today's call. As a reminder, today's conference is being recorded for replay purposes. I will now turn the call over to the Director of Investor Relations, Irene Tasi. Irene, you may begin..

Thank you, Carol, and good morning to everyone. Welcome to Masco Corporation's 2015 third quarter conference call. Joining me today are Keith Allman, President and CEO of Masco; and John Sznewajs, Masco's Vice President, Treasurer and Chief Financial Officer.

Our third quarter earnings release and the presentation slides that we will refer to during the call are available on the Investor Relations portion of our website. Following our prepared remarks, the call will be opened for analyst questions. As a reminder, we would appreciate it if you would limit yourself to one question with one follow-up.

If we are unable to take your questions during the call, please feel free to contact me directly at 313-792-5500. Statements in today's presentation will include our views about Masco's future performance, which constitute forward-looking statements.

These statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. We have described these risks and uncertainties in our Risk Factors and other disclosures in our Form 10-K and our Form 10-Q that we filed with the Securities and Exchange Commission.

I'd like to remind you that the results we will review today exclude our Installation Services segment reflecting our spin-off of TopBuild Corp, the business comprising that segment, on June 30. Today's presentation also includes non-GAAP financial measures.

Any references to operating profit, earnings per share, or cash flow on today's call is adjusted unless otherwise noted, with a reconciliation of these adjusted measurements to GAAP in our quarterly press release and presentation slides, which can be found in the Investor Relations section of our website, www.masco.com.

With that, I'll now turn the call over to our President and Chief Executive Officer, Keith Allman..

Thank you, Irene, and good morning, everyone. Turning to slide 4. With three quarters behind us, I'm pleased with our financial and operational performance in 2015. Our brands continue to drive underlying top-line growth, and we are executing well against an improving macro environment.

Our focus on execution resulted in outstanding margin expansion and further positioned our businesses for growth in 2016. Excluding the impact of currency, which cost us $66 million in the quarter, our top line increased 4%. Notably, our operating margin increased 190 basis points to 14%, the best third quarter margin that we have had since 2007.

This reflects our continued strong operating leverage as well as our discipline around cost control. Compared to the third quarter of last year, we achieved 26% growth in earnings per share to $0.34 per common share. I'd like to now provide you with some additional insight into the drivers behind each of our segment's performance.

Let's begin with Cabinetry. This business once again exceeded our expectations and continues to write an impressive turnaround story. KraftMaid reaffirmed its leadership position and grew in both the retail and dealer channels.

KraftMaid led category sales at big box retailers and had top-line growth of 9% at dealers as consumers moved up the price continuum with KraftMaid Vantage. Offsetting this top-line growth was our deliberate exit of low-margin builder business.

This is an important element of the turnaround plan and lays a stronger foundation for the business to profitably grow in 2016. Given Cabinetry's performance against their turnaround plan, we now expect this segment will achieve operating profit of approximately $40 million in 2015.

I'm proud of our accomplishments in this business and the important momentum we have established for Cabinetry going into 2016. Our portfolio of plumbing businesses continued their strong execution and grew sales in North America by 8% when you exclude the impact of Canadian currency, and grew internationally by 4% in local currency.

Sales were particularly strong in the trade channel as our high-end Brizo and Hansgrohe product line continue to resonate with consumers seeking to trade up to higher price points.

On the retail side, our industry-leading innovations such as Touch2O Technology and in2ition with H2Okinetic Technology continue to drive foot traffic to our channel partners and further solidify Delta's number one share of shelf position at retail. In addition to our strong financial results, the U.S.

Environmental Protection Agency recognized our Delta Faucet Company as a 2015 WaterSense Sustained Excellence Award Winner. This award is the highest partner recognition that the EPA grants and demonstrates Delta's commitment to protecting the environment and to introducing relevant and valuable innovation.

In our Paint business, despite softness in overall architectural coating demand, Behr's MARQUEE and PRO product lines drove low to mid-single-digit gallon growth in the quarter. This growth was masked by a combination of higher promotional spend, as we discussed on last quarter's call, and the impact of currency on Canadian sales.

Together with the Home Depot, we plan to grow our leadership position in the architectural coatings market by leveraging Behr's industry-leading customer satisfaction as ranked by J.D. Powers, as well as our industry-leading quality as ranked by Consumer Reports for both interior and exterior paints as well as exterior stains.

Additionally, in the Decorative Architectural segment, Liberty Hardware was awarded the Home Depot's 2015 Marketing Innovation of the Year Award, recognizing Liberty's leadership in developing effective and creative social media campaigns.

In our Other Specialty Products segment, Milgard Windows, the leading window brand in the Western United States, had another great quarter. Milgard had low-double-digit sales growth as they drove growth across all channels and consistently executed against the dynamic economic environment.

The low-double-digit growth of their innovative new products including the Essence window and door line and Moving Glass Wall systems contributed to Milgard's market share gains and improved mix in the quarter.

From a capital allocation perspective, we accelerated our share repurchase activity in the quarter and bought back approximately 7.6 million shares. In the last 12 months, we have repurchased over 20 million shares returning $0.5 billion to shareholders, and thus delivering on our commitment to drive shareholder value.

Now, I would like to turn the call over to John who will go over our operational and financial performance in detail.

John?.

Thank you, Keith, and good morning, everyone. As Irene mentioned, most of my comments will focus on adjusted performance excluding the impacts of rationalization and other one-time charges. We continued our favorable momentum coming out of the second quarter and drove strong profitability across all segments.

I'm pleased to report the third quarter was our 16th consecutive quarter of year-over-year sales and profit growth. Excluding the impact of foreign currency translation, sales increased 4%. Foreign currency translation negatively impacted our sales in the third quarter by approximately $66 million, principally due to a weaker euro compared to the U.S.

dollar. North American sales were up 3% for the quarter. We experienced growing demand for our repair and remodeling products including our small ticket paint, plumbing, and builders' hardware products as well as our big ticket kitchen and window products. As a reminder, repair / remodel activity now represents approximately 82% of our total sales.

International sales increased 4% in local currency in the quarter driven by the continued strength of our International plumbing and window businesses.

And our discipline around cost control continues to payoff contributed to our strong bottom line performance as operating income increased 16% in the quarter to $257 million, with operating margins expanding 190 basis points to 14%. The effect of currency negatively impacted operating income by approximately $10 million in the quarter.

And our EPS was $0.34, an improvement of $0.07 or 26% compared to the third quarter of last year. Please turn to slide 7. The strength of the U.S. dollar once again masked the continued strong performance in our Plumbing segment.

Excluding the $57 million impact of foreign currency translation, sales increased 6% driven by growth in faucets, spas, and new program wins in rough plumbing.

Excluding the impact of foreign currency translation related to the Canadian dollar, our North American sales grew 8% as we experienced strong growth in both the trade and retail channels in the quarter. Our Delta Focus product line and our Brizo brand continue to drive consumer demand for our innovative new products in the showrooms.

The growth at Watkins, our leading spa business was primarily due to the strength of our Caldera and HotSprings brand, as well as our acquisition of Endless Pools. And new program wins in the rough plumbing aisle and retail drove increased sales at BrassCraft. Our European businesses continue to outperform, delivering 4% growth in local currency.

Hansgrohe was driven by the growth in the trade channel, as well as the strength of its brand, design and innovation. Excluding the impact of foreign currency translation and the unfavorable impact of our commodity hedge, operating profit increased 9% in the quarter. Please turn to slide 8.

In the Decorative Architectural segment, the continued growth of Behr Pro and our Behr MARQUEE interior products resulted in low to mid-single digit gallon growth in the third quarter. Sales increased 1% in the quarter due to the timing and amount of incremental promotional expense, and the $3 million impact of Canadian dollar currency translation.

We see opportunities to grow this business by investing behind it in the four key areas.

Number one, promotions; number two, program resets where we invest in merchandising to support our new business wins and increase consumer awareness of our products; number three, advertising, which strengthens our brands and drives foot traffic to our channel partners; number four, the Behr Pro business where we partner with the Home Depot to realize our mutual goal of gallon growth.

As we foreshadowed on our last earnings call, this incremental investment impacts this segment's third quarter results by approximately $25 million. Please turn to slide 9. In the Cabinets segment, we experienced strong retail sales.

Additionally, our dealer exclusive KraftMaid Vantage program continues its strong performance in the dealer channel, enjoying both volume and favorable mix. As a result, KraftMaid's dealer sales grew 9% in the quarter.

This favorability was more than offset by the deliberate exit of low-margin builder business, as total sales in the segment decreased 5% in the quarter. Segment profitability in the third quarter improved $26 million over the prior year.

This was driven by continued growth of our higher price point semi-custom KraftMaid offering, the reduction of last year's incremental spend on ERP inefficiencies and the benefits associated with other cost savings initiatives.

As Keith mentioned earlier, the cabinet team is focused on driving their turnaround plan in 2015 as they continue to introduce new products at retail and dealers and improve the execution in our Merillat business. We now believe we will deliver operating profit of approximately $40 million in 2015. Please turn to slide 10.

Excluding the impact of foreign currency translation, our Other Specialty Products segment sales increased 11%, driven by low-double-digit sales growth in our North American window business. This growth was driven by volume increases, the continued benefit of favorable mix shift towards our premium window and door product lines.

Excluding the negative impact of a stronger U.S. dollar, our European window sales increased 9% due to market share gains and the successful acquisition we announced in the second quarter of Evolution Manufacturing, a leading full-service window solutions provider in the UK.

This segment's operating profit growth of 15% in the quarter is principally attributable to increased volume. Turning to slide 11. We ended the quarter with approximately $1.5 billion of balance sheet liquidity.

We delivered another strong quarter of working capital performance, as working capital as a percent of sales improved 50 basis points versus the prior year to 13.1%. We continue to take initiatives to unlock shareholder value.

As Keith mentioned earlier, during the third quarter, we repurchased 7.6 million shares, or approximately 2% of our common stock. And we remained well positioned to retire $300 million to $500 million of debt next year. So, with that, I'll turn the call back over to Keith..

our brands, our innovation and our operational excellence. With that, I'd like to now open the call up for questions, and back to you, Carol..

Thank you. In order to ensure that everyone has a chance to participate, we would like to request that you limit yourself to asking one question and one follow-up question during the Q&A session. Our first question comes from the line of Dennis McGill from Zelman & Associates. Your line is open..

Hey. Good morning. Thank you, guys.

John, I was just hoping you could maybe talk to the cadence a little bit of the promotional spend within Decorative Architectural as we think about the fourth quarter knowing there's some volatility there throughout the year, and how we should maybe think about that and balancing that against the raw material environment as well?.

Sure, Dennis. As we talked about in the second quarter call, you may recall the fact that this year was an unusual year for us because typically, the 4th of July promotion that we run in the Decorative Architectural segment spans both the end of the second quarter and the beginning of the third quarter.

And just the way that the timing fell this year, we experienced all that promotional expense in the third quarter this year. So, there's a little bit of a benefit to the second quarter due to the lack of that promotional spend. And now it penalizes the third quarter because of the timing of that.

As we go forward into the fourth quarter, we don't expect a significant incremental promotional expense, largely because we incur promotional expense around four major holidays through the course of the year. One is the spring Black Friday event, the second is Memorial Day, the third is 4th of July, and the fourth is Labor Day.

So, that's where we're promoting our products. (18:24) fourth quarter should be relatively muted. The second part of your question relates to the commodities that we're facing, and clearly, we've seen modest commodity price deflation in the quarter.

But that said, we took some of the benefit of that and reinvested in promotions in our Behr Pro business during the quarter. So, we feel really good. While we're seeing some benefits, we're reinvesting back in the business to grow the gallons that both we and our partner, our channel partner Home Depot, desire..

Okay. That's helpful, John. And then – and I guess kind of a similar question on the Plumbing side. Taking a hit on the hedge in this quarter would suggest that you've got some benefits coming in the forward quarters.

Can you maybe just review how you're thinking about the price versus commodity relationship there?.

Yeah. As you know, both copper and zinc have come down pretty significantly during the course of the year. And up until the third quarter, the impact of the hedge on a quarterly basis – and just to maybe recalibrate everyone, we have to mark to market our hedge positions on a quarterly basis because we do not get a hedge accounting.

And so, to your point, as we go forward, because we mark to market, if there's no further movement in the price of copper or zinc, there should be relatively little impact to our financial statements in any future periods..

Okay. Thank you, guys..

Thank you..

Our next question comes from the line of Keith Hughes from SunTrust. Your line is open..

Thank you. Just there's been a lot of fears in this sector of slowdown in the other parts of economy affecting the kind of businesses you're in and your peer companies.

Can you give us any sort of feel on your overall pace of business through September and October? Have you seen any kind of rate change, positive or negative, to the orders coming in?.

It really has been pretty steady for us. This is Keith. Good morning. Our R&R demand has been chugging along right at about 4% to 5% in terms of the overall market demand, and we're seeing that consistent across the regions of the country. As you'll recall, we have about 82% of our demand driven by repair and remodeling. So, it's nice and steady for us.

I think as home prices appreciate and consumer confidence continues to be strong, and you overlay that with deferred investments that we've seen in R&R over the past couple of years, it's shaping up nicely for us. So, it's been steady.

And when you compare that to how our more R&R-driven business have performed with our plumbing business in North America up 8%, Milgard Window up double digits, KraftMaid (21:08) dealer which is heavy R&R up 9%, and even our paint while the market was a little soft in the quarter with low double digit, low to mid-double-digit gallon growth in the quarter..

Low- to mid-single digit..

Excuse me. Sorry about that. We feel good about how – not only the market to your question but also how we're performing against that market..

And to go back to the Decorative Architectural division; number one, what role does Liberty Hardware play in the numbers there? Positive or negative? And then on the margins, which were just outstanding, given you had promotional spend, if you kind of list off 1, 2, 3, what helped you out on the margin in that division and (21:52)..

Go ahead, John..

On the Liberty side, Liberty did have a small impact on the top line, Keith, as we had begun the rollout of a shower door program that we won at one of the major retailers in the third quarter. It's not that completely reset, but they did have an impact on the top line. And so, they did benefit from that.

In terms of the second half of your question, which is what benefited the bottom line, I think there's a couple of things that benefits the bottom line, but a couple of things that detracted from the bottom line. Obviously, the increased volume that we experienced in the quarter was a help.

We did have a favorable price commodity relationship in the quarter. But offsetting some of that was some of the investments that we made that we discussed, both on my prepared remarks and in the prior question. As we move forward, we feel good about the profitability.

And we do think that given the DAP segment that long run you should think about this business as about an 18% margin business..

Okay. Thank you..

Your next question comes from James Armstrong, Vertical Research Partners. Your line is open..

Good morning. Thanks for taking my question. My first one is on the Cabinet segment.

How much did lower lumber and plywood prices during the quarter help margins? And what are you seeing in the overall pricing environment in Cabinets?.

I'll handle the commodity half, I'll let Keith talk about the pricing side. We saw very little impact from lumber or hardwood kind of pretty much offsetting each other in the quarter. We saw a little bit of deflation on one end and a little bit of inflation on the other, but pretty much a muted effect of commodities.

So, not much of a tailwind to the bottom line. A lot of that bottom line improvement was purely operationally driven..

I'd think about pricing overall in the market as stable. Some time ago at the end of Q4 of last year, we tweaked our promotional strategy a little bit, and brought it up to what we believe is on par with the market. That's working well for us. We're seeing good growth as we've mentioned, particularly in the retail space.

So, overall, I classify the pricing environment in cabs as pretty stable?.

Perfect.

And then in the paint segment, could you talk a bit about the PRO customer? And are you continuing to gain share there, or are you seeing a stabilization?.

We're gaining share in the PRO. I feel really good about that. That's an initiative that we've aligned very closely with the Home Depot and have a series of work streams that we're driving that really span the whole continuum of product, of how we're promoting it, the training we're doing, and our approach to how we're penetrating markets.

So, it's important to us, and we're definitely outgrowing the market in the PRO and intend to continue to do that..

Perfect. Thank you very much..

Your next question comes from Stephen Kim from Barclays Capital. Your line is open..

Thanks very much, guys. I just wanted to ask – I guess I'll start of by asking a question about the Cabinets business. You talked about exiting the builder business.

Can you remind us when you first – when you start anniversarying that exit? And how much of the profit improvement that we saw in the quarter would you say was related to exiting that business, let's say, if it was generating losses?.

Stephen, the exit of the lower-margin builder business was really an initiative that Joe Gross kicked off when we put him in it – as CEO of the business earlier this year. And so, relatively muted impact – less of an impact than in Q2 when he really first came on board. More of an impact obviously here in Q3.

So, I would say that we're really in the first quarter of experiencing that – the exit of the lower-margin builder business. And remind me the second part of that question..

Oh, it's just that – is that a business that you were losing money in? I mean, so as we think about exiting that business, are we seeing improvement in profitability in actual profit dollars from exiting that business?.

It clearly wasn't as profitable as our base business in Cabinetry. So as we exit that business, Stephen, it's most definitely improving our profitability and the performance of the business. And that's really something that, as Joe and I looked at this business, made the call to really get this business better before we get it bigger.

And that's working for us, and we're positioning the business now for further growth as we move into 2016..

Great. I guess my second question, shifting gears to the Plumbing business. As we look at the FX impact, it looked like if you just sort of took the profit impact divided by the sales impact, it would imply a margin of about 12%. Last quarter was like 19%. I imagine there's probably some adjustments there which complicate that simple calculation.

But if you could help us sort of think through that? Was there anything unusual in that figure? We usually think of Hansgrohe as a very profitable business, for example.

So, if you could just help us out there?.

Excuse me, perhaps I'm not following.

You're comparing Q2's international sales to our international profitability – to our Q3's international profitability; is that...?.

Well, I guess what I'm saying is that if we just look at – you mentioned that the – I'm just looking here at your slide, the impact from FX was $7 million on the profit line and impacted sales by $57 million. So that's about a 12%. If you just did a ratio, that's a 12% margin point..

Oh, I see what you mean. Yeah, I'm sorry, I misunderstood the question. Yeah, so what happened there, Stephen, you'll recall that we've got some other businesses in the Plumbing segment in Europe that aren't as profitable as Hansgrohe that do detract from that.

And some of that doesn't get all completely impacted because there's some in euros, some in pound as well that didn't move. So, that does impact that calculations slightly..

Okay. Got it. All right. Thanks very much, guys..

Your next question comes from Stephen East from Evercore ISI. Your line is open..

Thank you. Good morning, guys. Keith, generally people have asked you about what's going on in the market.

But if you look at each of your businesses one by one, can you talk about what you think the market's growing for each of those, are you picking up share in them? And are you starting to see any mix shift in each of those categories?.

Sure, Stephen. Let's start with Plumbing. We pegged the overall repair and remodeling market, and that's based to be around 4% to 5% growth, we think. And from a new home construction perspective in the back end, we'll see a little bit of an acceleration to finish out the year at about plus 10%.

So, if you average in somewhere around 80% R&R for that segment, you get a good feel for where the growth is. In terms of our performance there, with our North American sales being up currency adjusted 8%, feel good that we're taking share in that space.

And particularly, we're doing well in our showroom products and with the results that we're seeing from our new innovations and parts of the product assortment on a higher end. So, we are seeing a definite favorable mix as the consumer moves up. In terms of Plumbing in overseas, our European business is going well.

We continue to have a strong business in the UK, and we're growing that business in excess of the market. Over in China, clearly we're continuing to grow, and our brand is very well positioned and feel good that that's – it's one of the, if not, the strongest brands over there in China.

So, in terms of Plumbing, right about 4% to 5%, and we're outgrowing it. Milgard Windows, in that space, we've talked about that growth. That tends to be also more R&R driven. So, right – again, around that steady North American rate of around 4% to 5%.

And as we talked about with double-digit growth there, good, dynamic business, and continued to grow and gain share. The dealer business and the R&R business associated with Cabinetry, again, we think it's up in that same, steady 4% to 5% range in R&R. New construction is a little bit faster than that.

In terms of the mix we're seeing, without a doubt, in the repair and remodeling side we're seeing an uplift in the average ticket in consumers going towards more value-added finishes, and accessories, and that sort of thing, which drives up the ticket.

But we're also, by virtue of that fact that new construction is growing at a faster clip that will tend to be a little bit of a damper on the mix. But by and large, good mix there. Paint, as we talked about it, overall, the market, we're seeing as somewhat flat, call it.

And so, with our low to mid-single-digit growth rate there, we feel good about outpacing that market. So, overall, feel good about the underlying demand both in terms of repair and remodeling and new construction. And I'm proud of how our businesses have structured their work to outpace that growth..

Okay. That's great. Thank you. I appreciate it. And then if I can combine two little questions. On Cabinets, your business, your builder business had been, I think, about 45% of your business.

Where do you see that going over the next year or two? And then on Paint, one of your competitors said in the quarter they saw the home centers have slower demand, and consequently, the home centers also pulled back on ordering late in the quarter to control inventory.

Did you all see any of that?.

In terms of your first question, Stephen, on the builder side of our Cabinet business, I think it's important to delineate between more of the smaller regional builders, and then the bigger, call it, top 10, top 20 builders.

That top 10, top 20 builder business is leaner for us, and we're being very selective and careful about how we drive that business with an eye on profitability. When we look at the bigger chunk of the business, which is more the smaller and the regional business, we think that can be attractive business.

The key is having consistent delivery lead times and fill rates. And that's something that we've worked very hard to get back, and now we're working to get the confidence of that customer base back. And we will go after that. So, it's a mixed bag.

But certainly, there's business that we want and we're focused on, and we understand the segmentation of it. And there is business that isn't so much attractive to us. In terms of the home center demand in Paint, as I said, we think that the DIY or that section of the paint market is relatively flat, right in that flat range anyway.

And with our growth rate, we're happy with how we're performing. With our Color Center that's in place and the promotions that we're doing and the acknowledgment from various third parties about our customer satisfaction and our quality ranking, we feel pretty good about it..

Stephen, just maybe to supplement some of Keith's comments on – especially on the Paint side. You may recall in the September and October timeframe last year we had some unusual order patterns developed where we had very low orders in September but very, very strong orders in October of last year.

And so, we did not see the inventory pull back in the third quarter – as you might expect, since we're up against the difficult comp here in the first part of the fourth quarter, we are seeing a little bit of pullback vis-à-vis our – compared to last year.

So – but overall, I think as we get through the kind of the six-month window, I think we should be in just – fine shape..

Okay. Just some monthly timing issues.

Yeah?.

Yeah.

Next question, please?.

Our next question comes from the line of George Staphos from Bank of America. Your line is open..

Everyone, good morning. Thanks for taking my question and all the details on the call. Congratulations on the quarter. Two questions, one on Cabinets, and then one back to Decorative Arch and Paint. In Cabinets, you mentioned that performance was better than expected.

Could you talk a little bit about where the sources of the positive variance were in terms of operation it sounded like relative to your budget or forecast, and why you think that should be sustainable going forward? And back to Paint, certainly your outgrowing the category. You had what would appear to be very good margins.

You enumerated four areas where you can sort of drive growth through promotions, resets, advertising, and the PRO line.

Do you anticipate having to – maybe not this quarter but next year, given the margins you have in the business, having to reinvest in any one of those areas disproportionately to keep the growth higher than the market and the margins that you've got longer term? Thank you, guys..

On Cabinets, as we've talked about in the past, George, turnarounds are never any one-shot deal to get it done and they are seldom linear. There's ups and downs to them, and we've seen that. It's a balance between short and long-term initiatives, and a balance between cost out and revenue-up initiatives.

So it really wasn't one particular initiative that we drove that got us to this position. We certainly have worked on our costs and our efficiency and our material yields and scrap rates, and have worked very hard to overcome the misstep, frankly, that we had in 2014 with our ERP. So, that was a significant part of it. We have invested in innovation.

We have what we believe to be the best finishing system in our KraftMaid line that we recently put in in the last year, and we're getting a lot of good response from that. We've increased on the innovation front with some creative assortment work, particularly with KraftMaid Vantage.

And we are segmenting our markets, and we're driving hard particularly in the dealer channel, which is a very attractive and lucrative channel for us. So, it's a mixed bag across the board for us, and that's why we think that this type of performance is sustainable. In fact, we're looking to grow as we move into 2016.

Obviously, the seasonality around this business remains, but fundamentally, I like how this business has moved and a year ago, if you would have said, Keith, you could have this business in this position at this time, I'd take it. I think....

Keith, would it be fair to say that your outlook for 2016, again, there's nothing that is significant in terms of what will drive the year. So, it's not Vantage or the new Merillat. It's again across all these metrics..

I think that's fair. We're going across the different channels, and we're working with both our powerful brands, Merillat and KraftMaid. And I think thinking about this business in the 30% to 35% incremental is the right way to think about it..

Okay. Thank you on that.

And in Paints?.

In Paint, in terms of where we anticipate reinvesting it's really broadly across all those revenue drivers that John talked about. We've got our Color Center reinvestment behind us, and that's really strong. We're going to continue to drive with promotions and advertising.

We're going to look for ways to partner with the Home Depot to drive growth, particularly in the PRO segment in terms of how we train, how we staff stores, the products that we offer, and our supply chain and how we deliver products. So, it's an exciting and dynamic time for us in paint, and we're happy with how we've outperformed the market..

Thank you..

Your next question comes from the line of Nishu Sood from Deutsche Bank. Your line is open..

Thank you. First, I wanted to ask about the exit of the builder product lines in Cabinet. Kind of take a longer view, the spin of TopBuild obviously dramatically reduced your exposure to new construction, and you continue to pursue that strategy with the exit of these product lines in Cabinet.

As you look across your portfolio, I mean, clearly, that's been the right move from a profitability perspective.

Is that something you would continue to explore and maybe assess other parts of your builder business and other parts of your portfolio, continue to become more focused on just the remodeling market?.

I'd clarify a little bit Nishu in that we haven't exited builder lines, meaning lines of our cabinets or lines of our product assortment.

What we're doing is paying closer attention to a segmentation of the builders we have, particularly in the builder direct part of our business where we handle the last mile delivery, the installation and the punch out.

And what we're seeing in some cases the take-per-home is being reduced with the type of mix that's evolved in certain markets with certain builders. And that's just not an affordable proposition for us to manage all the value-added that we do on the backside with regards to delivery, and installation punch-out.

So, it's not an exit of builder line so much as it is a segmentation of various types of builders in certain regions, and then through pricing and through other mechanisms moving away from that business and directing our energy to more profitable business.

In terms of an overall strategy in our other segments, move away from builders, that's not really the case. We have good value propositions and good supply chains to be able to deliver profitably to most of the segmented builders in our other segments. So, that's not a broad strategy for Masco per se..

Got it. No. That's helpful.

And then since your – since this has improved operating margin (41:41) Cabinets, any updated thoughts on the longer-term goal of getting to high-single digits in Cabinets with the exit of the – I'm sorry, with the reshaping of the builder strategy and the products you're providing, would it change your views on what's possible longer term in this business?.

Nishu, it's John. No. We don't think it's changing our view longer term. Obviously, we were pleased that we reported 7.5% margins in the segments. So we feel we're well on our way to that high-single digit margin performance that we're seeking. There's a potential for some upside (42:16). It's too early to call.

We've had two good quarters so far in this cabinet in a long period of time and we don't want to get ahead of ourselves as to where we think this business can go just yet. So, we need to continue to execute our plan and turn it around, and then we'll talk in future periods about maybe if there's upside to what we've laid out for you..

You know, we've got – we've had good success in the cost outs, or we're starting to get traction on the growth side. We're deep into our planning process now and we're continuing, as we look at these plans, to drive both cost and revenue, and we'll continue to update you as we flesh those plans out more..

Okay. Thank you..

Our next question comes from the line of Bob Wetenhall from RBC Capital Markets. Your line is open..

Hey. Good morning. Very nice quarter. I wanted to ask you, last year you guys had a loss of $60 million in the Cabinets, and based on John's guidance, it sounds like you're on track to do $40 million, and a $100 million swing is a big improvement.

Just help us think about, in terms of framing, are you through the hard work? Is the ERP system really the big challenge, and now incremental gains are just going to be leveraged to the market recovery, or how do we think about the pace of improvement? Is the low-hanging fruit already clipped and now it's just a market cycle or other things you can do to drive operating income?.

I think we're through a big chunk of the hard work, Bob. I wouldn't quite characterize it that all the low-hanging fruit is clipped and now we're just a kind of on a market trajectory. But clearly, the better you get, the harder it is to get better, and we're getting better.

So, it is going to be tougher to make, and we won't make the kind of dramatic improvements that we've made so far. But having said that, we think we've got a long way to go. We're not – we don't have this business to its full potential.

That there are significant areas of growth that we can continue to drive both in terms of the retail, as well as the import and dealer business.

So, I think you're dead-on, Bob, in that it's – the big chunks are behind us in terms of the improvement pace, but again, back to that 30%, 35% dropdown margin, and the fact that we have these two powerful brands in KraftMaid and Merillat, I like where we're sitting..

Got it. And one for John. It looks like free cash flow is going to be – free cash flow generation is going to be robust next year. And could you just remind us of what you're thinking in terms of capital allocation priorities? Is it debt repayment? Is it M&A? Is it buybacks or dividend? Thanks, and good luck..

Yeah. Thanks, Bob. As we've talked about before, we have a very (45:20) and balanced approach to our capital allocation. So, first and foremost our capital – first priority is to reinvest in the business and grow it. I think many of you know that our CapEx – we're relatively light on the CapEx side compared to some of our competitors.

CapEx runs about 2% of sales. So, that's our number one priority. After that, we really do take a balanced approach, and we balance three or four items. The first is dividends.

We do pay a dividend, and we increased our dividend as you may know, for this dividend that we're paying here in the fourth quarter of this year, about a 6% or 7% dividend increase. That's following a 20% dividend increase last year.

And then after that, we've talked about our share repurchase program which we said would be, on average, between $400 million to $500 million a year, and we're clearly on pace to do that here in 2015. We also balanced that with acquisitions.

Again, we've been thinking about smaller acquisitions, more bolt-ons, particularly in our Paint and Plumbing area. We've hired an executive, Amit Bhargava, to really pursue that and build our M&A pipeline and so we're aggressively pursuing that. That's clearly part of our strategy. And then debt repayment is on our radar screen.

As many of you may know, we have a $1 billion maturity coming due in October of next year. And we've been talking for several years about taking $300 million to $500 million of that debt down when that maturity comes due. So, a clear and balanced approach.

And we'll keep you updated as things change, but we think we've got a good sense of how we're going to spend our cash over the coming year..

Our next question comes from the line of Michael Rehaut from JPMorgan. Your line is open..

Hi. Good morning. It's actually Will Wong on for Mike.

How are you?.

Good.

How are you?.

Good. Regarding Cabinets, just a quick housekeeping question.

Can you just remind us again what the sales impact was from the direct-to-builder exit?.

Yeah. We didn't parse it out, specifically, but I think if you do the read-through, Will, sales impact was down approximately $10 million from that line of business based on dealer sales being up 9% and half our business being – the other half of our business being builder-oriented. So, that's a rough number..

Okay. Got it.

And with regards to raw material costs, can you just talk about what the impact was on the quarter and as well as what you're expecting in 2016, if you're expecting any incremental benefits from lower raw material costs?.

Regarding specifically in Cabinetry or....

Just across the different segments, the four different segments..

So, commodities generally have been – we talked a little bit about Plumbing earlier, copper and zinc have come down a little bit and that's reflected itself in our metals hedged impact. At this point, we are not forecasting any further price deflation in commodities next year. We've had a very little impact in our Cabinet business.

We are seeing a little bit of price inflation in the windows side on glass. And so we may need to work with our suppliers as well as look at our pricing on windows next year. But it's a little bit too early to determine exactly how we're going to play that as glass prices change in the marketplace..

Over the mid to long term, we tend to be flush when it comes to price commodity. That's how I think about 2016..

Great. And then just lastly with regards to Plumbing.

Can you just talk about the relationship between sell-in versus sell through, and what you're seeing in both retail and wholesale in terms of inventory?.

When you look at wholesale, there's really two types of wholesalers that we sell to, though, broadly speaking, there is the wholesalers with distribution centers, and wholesalers that we ship directly to their warehouses. And in both cases, we're seeing pretty consistent POS matching our shipments into their chains.

So, I would say that on the Plumbing side in wholesale, it's pretty level, pretty level flow through..

Will, maybe to complement some of Keith's comments. We've got very high service levels in our Plumbing businesses. So that doesn't – that means our customers aren't required to hold as much inventory as maybe they are with some other of our competitors. So, we feel really good about the service levels that we provide..

Okay, thank you..

Our final question today comes from the line of Megan McGrath from MKM Partners. Your line is open..

Good morning. Just wanted to follow-up a little bit on the Paint business. You talked about the market being flattish overall, although you're gaining some share.

Any thoughts – could you remind us sort of how that trended, first of all, versus last quarter in terms of the market? And any thoughts as to why the flattening out? Was there any weather impact, maybe where you're seeing strength versus weakness would be helpful. Thanks..

We obviously have our feelers out in both the channels and in the markets, and we do consumer research and have a somewhere of a feel for it. But admittedly, it's tough to tell in terms of the drivers of the relative softness in the space.

In Q2, while we didn't see a significant impact to the weather, that was certainly noise that out there in the market, without a doubt. It was a wet summer and that affects the demand. So, I think that could play into it.

But overall, when you look at how people have the opportunity to defer paint, it's not that big of a purchase item, we feel good about the underlying demand in 2016..

Okay. Great. And a quick one on Milgard. You talked, I think, if I remember correctly at your Analyst Day about expanding that business geographically.

Could you give us an update there?.

We are. We talked about that in Texas. We have a new factory that we're bringing up out there. In fact, I'm on a plane here in a few hours to go out there and visit Milgard and talk about how they're doing. They're doing very well. We talked about their growth rates. We're a new player into Texas. We've been shifting into that from outside of the market.

We're new in terms of our factory being on site there. So, there's plenty of headroom for us in terms of share gain and incremental growth for us starting at the small base that we have. Texas is a big market, and we're looking forward to a success there..

Thanks. And if I could throw one really quick modeling question in there.

It sounds like in terms of the Cabinet exit, you're not expecting to – is it fair to say you're not expecting to accelerate that exit from the builders? So, if we sort of use that number, John, that you gave us around $10 million for looking for the next couple of quarters, would that be fair?.

Yeah. Megan, I think that's the way to think about it..

Okay. Thanks..

This concludes today's conference call. You may now disconnect..